A New Era of Currency Derivatives Market in India: Dr. E.V.P.A.S.Pallavi
A New Era of Currency Derivatives Market in India: Dr. E.V.P.A.S.Pallavi
A New Era of Currency Derivatives Market in India: Dr. E.V.P.A.S.Pallavi
e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 6, Issue 3. Ver. III (May.-Jun. 2015), PP 36-40
www.iosrjournals.org
Abstract: The introduction of currency derivatives in India has passed a journey of almost eight years and
many changes have been implemented in the trading system in this regard. The main theme of this paper is to
assess the development of currency derivatives in India. In order to study the growth of the currency derivatives,
the number of contracts traded, trading volume and open interest at NSE are studied. The currency derivatives
have received a good response from the investors as well as the hedgers. Currently, only resident Indians
(including individuals, companies and financial institutions) can trade in the four currency pairs available in
the local market-dollar/rupee, pound/rupee, euro/rupee and yen/rupee. Average turnover of these instruments
in the National Stock Exchange is eight times higher than a year earlier. The average daily turnover of currency
futures and currency options is Rs 16,778.20 crore in 2015. The risk involved is comparatively low in this case
and currency derivatives has proved to be a good tool for hedging the risk involved in the currency of a country
(currency risk). It is hoped that the currency derivatives market will develop faster and it will be a good choice
for all the market participants in the near future and it will find its way in the Indian economy.
Keywords: currency futures, currency options, open interest, volume traded.
I. Introduction
Derivative is a risk-shifting agreement, the value of which is derived from the value of an underlying
asset. The underlying asset could be a physical commodity, an interest rate, a company‟s stock, a stock index, a
currency, or virtually any other tradable instrument upon which two parties can agree. Derivatives fall into two
categories. One consists of customized, privately negotiated derivatives, which are known generally as over-the-
counter (OTC) derivatives, or even more generally, as swaps. The other category consists of standardized,
exchange-traded derivatives, known generally as futures
Each country has its own currency through which both national and international transactions are
performed. All the international business transactions involve an exchange of one currency for another. The
price of one currency in terms of other currency is known as exchange rate. The foreign exchange markets of a
country provide the mechanism of exchanging different currencies with one and another, and thus, facilitating
transfer of purchasing power from one country to another. With the multiple growths of international trade and
finance all over the world, trading in foreign currencies has grown tremendously over the past several decades.
Since the exchange rates are continuously changing, so the firms are exposed to the risk of exchange rate
movements. As a result the assets or liability or cash flows of a firm which are denominated in foreign
currencies undergo a change in value over a period of time due to variation in exchange rates. This volatility in
the value of assets or liabilities or cash flows is referred to exchange rate risk. Since the fixed exchange rate
system has been fallen in the early 1970s, specifically in developed countries, the currency risk has become
substantial for many business firms. As a result, these firms are increasingly turning to various risk hedging
products like forwards, futures, options and swaps.
Concept Of Derivatives
The term „derivatives, refers to a broad class of financial instruments which mainly include options and
futures. These instruments derive their value from the price and other related variables of the underlying asset.
They do not have worth of their own and derive their value from the claim they give to their owners to own
some other financial assets or security. A simple example of derivative is butter, which is derivative of milk.
The price of butter depends upon price of milk, which in turn depends upon the demand and supply of milk. The
general definition of derivatives means to derive something from something else.
The asset underlying a derivative may be commodity or a financial asset. Derivatives are those
financial instruments that derive their value from the other assets. For example, the price of gold to be delivered
after two months will depend, among so many things, on the present and expected price of this commodity.
As defined above, the value of a derivative instrument depends upon the underlying asset. The
underlying asset may assume many forms:
Commodities including grain, coffee beans, orange juice;
Precious metals like gold and silver;
Foreign exchange rates or currencies;
Bonds of different types, including medium to long term negotiable debt securities issued by governments,
companies, etc.
Shares and share warrants of companies traded on recognized stock exchanges and Stock Index Short term
securities such as T-bills; and Over- the Counter (OTC)
Classification Of Derivatives:
On the basis of this classification the derivatives can be financial or non – financial derivatives:
Financial derivatives: Those derivatives which are of in financial nature are called financial derivatives. They
are as follows:
(i) Forwards
(ii) Futures
(iii) Options
(iv) Swaps
The above financial derivatives may be in the form of credit derivatives, forex, currency fixed-income, interest,
insider trading and exchange traded.
Non-financial derivatives: Those derivatives which are not of financial nature are called non-financial
derivatives. They are as follows:
(i) Commodities
(ii) Metals
(iii) Weather
(iv) Others.
Currency Derivatives:
Currency derivatives are complex financial instruments which are traded over – the – counter and this
is a collective term used for futures, forwards and swaps. Currency derivatives are used for hedging. This
hedging involves a future payment or receive in a foreign currency.
Currency futures: A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain
underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying is an
exchange rate, the contract is termed a “currency futures contract”.
Currency options: A currency option is a contract giving the option purchaser (the buyer) the right, but not the
obligation, to buy or sell a fixed amount of foreign exchange at a fixed price per unit for a specified time period.
Currency swaps: A currency swap is an agreement between two parties to exchange cash flows in two different
currencies. The swap consists of interest rate differentials between currencies.
Research Objective: The main objective is to know the development patterns of currency derivatives in India
with respect to National Stock Exchange (NSE).
Open Interest:
Open Interest is the total number of outstanding contracts that are held by market participants at the end
of the day. It can also be defined as the total number of futures contracts or option contracts that have not yet
been exercised (squared off), expired, or fulfilled by delivery.
Open interest applies primarily to the Futures Market. Open interest, or the total number of open
contracts on a security, is often used to confirm trends and trend reversals for Futures And Options contracts.
Open interest measures the flow of money into the futures market. For each seller of a futures contract there
must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to
determine the total open interest for any given market we need only to know the totals from one side or the
other, buyers or sellers, not the sum of both. The open interest position that is reported each day represents the
increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.
Table 5: Records achieved in the Currency Futures & Options Segment from the date of
inception till 31 March 2014
Currency Derivatives Segment Date Number/value
Record number of trades 20-Jun-13 390,049
Record number of contracts 20-Jun-13 11,534,563
Record Daily Notional Turnover (` Crores) 20-Jun-13 69,323.90
(Source: NSE fact book 2014)
It can be observed the records achieved in the currency futures & Options segment from the date of
inception. As the currency futures trading started at NSE on August 29, 2009 and currency options trading
started on October 29, 2010. Since its inception currency futures & options are showing tremendous
performance in terms of trades, contracts and turnover. The total trades recorded under this segment were 3,
90,049 total contracts were 11,534,563. Further if we observe the daily notional turnover 69,323.90 crores on
June 20, 2013. This shows the currency derivatives segment is showing explosive growth in future currency
futures & options contracts on the basis of turnover it can be observed that Total Traded Value of Currency
Futures & Options for FY 2013-14 is ` 4012513.45 Crores.
Table 6: Top 5 Currency Futures & Options Contracts on the basis of turnover for the
financial year 2013 - 14
Rank Contract name Total Traded Value (%) to
Total Traded Total traded value
currency Futures & options
Quantity (in Crs)
Instrument Type contract symbol Total value traded
1 FUTCUR USDINR 76,525,555 442,867.94 11.04
2 FUTCUR USDINR 55,719,165 333,349.66 8.31
3 FUTCUR USDINR 58,638,824 321,910.37 8.02
4 OPTCUR USDINR 47,313,672 274,570.32 6.84
5 FUTCUR USDINR 38,522,829 249,298.08 6.21
(Source: NSE fact book 2014)
III. Conclusion
The Indian currency derivatives market has experienced an impressive growth since its introduction of
currency futures and options. The upward trend of the volumes and open interest for currency futures and
options in NSE explains the progress in detail. Currency futures has proved to be a good tool for hedging the
risk involved in the currency of a country (currency risk). It is hoped that the currency futures market will
develop faster and it will be a good choice for all the market participants in the near future and it will find its
way in the Indian economy. Currency futures and options are traded under exchange traded and over – the –
counter. The growth in terms of volumes and participants in the Exchange Traded Currency Derivative Segment
would improve the process of assimilation various global and domestic economic information into the markets
while it discovers its exchange rates. Extension of trading hours would also help participation in the exchange
traded currency derivatives markets to mature in terms of reflecting information into markets and thereby
become efficient in their price discovery process, besides remaining as the cost effective market for participants.
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